Insights and News /

24 June 2016

CMA Blog 3: Prepayment price cap – suppliers need to cut costs and revisit smart and debt strategies

The CMA confirmed in its Final Report today that a price cap will be imposed on all prepayment (PPM) tariffs until at least 2020. The most material change is that SMETS2 meters  are now exempt and the level of the cap will change twice per year rather than annually. 

The CMA still predict that the revenues of the six largest suppliers will fall by £300m as a result of the cap, so to reduce the impact they will have to find ways to cut the cost to serve PPM customers, align their wholesale hedging strategies with the CMA’s approach and shift bad debt charges to other payment methods.
Suppliers will also need to consider the potential impact of the cap on the smart roll out. Given SMETS2 meters will be exempt (and the cost to serve such cusotmers should be lower than those with traditional meters) there is an incentive for suppliers to move PPM customers to SMETS2 meters as soon as possible. However this could be tricky since the incentive for customers to switch may reduce if suppliers cannot offer them a price reduction for switching. There is a further risk that non-PPM customers on smart meters will switch to PPM to get the regulator-capped price – further reducing supplier revenues.
Suppliers should also revisit their approach to debt management. Traditionally, PPM meters have been used as a means of helping customers to repay or avoid debt. But under the price cap, PPM tariffs are likely to generate little or no margin for suppliers. So the tipping point at which it becomes beneficial to move a customer to a (lower margin) PPM product will change. We could see suppliers writing off more bad debt or using other means of debt collection. 
So depsite the tweaks to the design of the remedy, there is still a de facto cap on all PPM prices and the impact on suppliers will be painful and wide ranging.